Roku enthusiasm likely 'played itself out' for now: Analyst

Roku (ROKU) stock received a downgrade from "Neutral" to "Sell" with a price target of $75 per share from Seaport Research Partners. Competition from streaming giants Netflix (NFLX) and Disney+ (DIS) and general pullbacks in media spending have presented ongoing challenges to the smart TV developer.

Seaport Research Partners Senior Analyst David Joyce joins Yahoo Finance to take a deep dive into Roku and discuss his thoughts on how the company will operate and perform moving forward.

"We're concerned that their ad growth right now seems to be lagging that of the digital video industry. We have them growing maybe 9% this quarter, another 9% next year," Joyce explains. "In part, the up-front markets were a bit soft. They also rely on media and advertisements which has been delayed because of the writers and actors strike earlier this year. The rest of the digital video ad market should be growing in the 12% or 13% range, so on the margin it seems like their share is slipping. "

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Video transcript

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- Roku getting a downgrade to sell from Seaport Research Partners citing caution on its growth prospects and a valuation that's tough to justify. It's coming amid a competitive streaming landscape with Disney Plus and Netflix gobbling up a large chunk of the ad supply.

For more on the state of Roku, we bring in David Joyce. Seaport Research Partners senior media analyst. David, it's great to see you. So no fan of Roku. You're telling your clients this one is officially a sell. How come, David? What's the argument?

DAVID JOYCE: Well, thanks for having me. So Roku shares actually have done quite well in the fall. We just launched coverage back in early October and it was roughly 70. It dipped to 56 before earnings and then went on a tear last week, even touched 110. So that's just in the course of a couple of months.

It was trading last week at 3 and 1/2 times revenue. Even today, it's at 3.1 times revenue. And they're still burning cash through most of 2025.

They do have plenty of cash on hand to handle that, so we're not concerned about their liquidity. I think it is still quite a viable business model. It still has a good position in the marketplace. But where we're concerned is that their ad growth, right now, seems to be lagging that of the digital video industry.

We have them growing maybe 9% this quarter, another 9% next year. In part, the upfront markets were a bit soft. They also rely a lot on media and entertainment advertising, which has been delayed because of the writers and actors strike earlier this year.

The rest of the digital video ad market should be growing in the 12 or 13% range. So on the margin, it seems like their share is slipping. We think that that's going to these new advertising tiers that Netflix has come out with, and that Disney Plus has come out with.

And also looking ahead, we still have to do more work on it, but Amazon Prime Video is getting more into video advertising as the expectation, given that they've been investing in content.

So that's just one of the areas where I think that the valuation, the enthusiasm on what Roku does, is probably played itself out for now. Just a little concerned about what the competitive landscape might be doing on the advertising side.

Additionally, we have some concerns about where the device side of the market is going. It's not an area where they're trying to grow profitability, but it is an area where they have really driven a lot of their active users.

And the great thing that Roku did for the overall streaming industry was train consumers to start streaming. They got people off of their very clunky, older definition of smart TVs or connected TVs, using the Roku devices. And now Roku has its own TV as well.

But as people cycle out their TVs and get new ones, increasingly, you're having more apps where the consumer can go straight to the content provider, the Disney Plus, the Netflix, and you not necessarily need the Roku device now.

So it is an installed base of 75 million that provides a lot of value, provides some ad impressions. But we think that the growth trajectory might be slowing from here.